ADVICE

Rebuilding Credit After Bankruptcy

Filing bankruptcy might feel like a financial disaster and make it seem like you'll never be able to borrow money again. Not only are each of the debts included in the bankruptcy marked as settled, but the public record of the bankruptcy filing also appears on your credit report. There is nothing you can do to remove the negative information. Each piece of negative information will remain on your credit report for seven full years after it occurs (or ten years in the case of Chapter 7 bankruptcy).

While it is true that it is more difficult to obtain credit, especially immediately after a bankruptcy, it is not impossible. The bankruptcy's effect on your credit score diminishes somewhat as it becomes less recent, and then its effect will stop when the information gets removed from your report after the seven to ten year period. In the meantime, there are several things you can do to improve your credit score by adding positive information to your credit report.

Get a credit card: Your previous credit cards were likely all included in your bankruptcy. However, it is important to have at least one revolving credit account, like a credit card, on your credit report. This account should be in good standing, with no late payments and a low outstanding balance compared to the credit limit. There are two main ways to get a credit card after bankruptcy:

  1. Have a family member or friend add you as an authorized user on one of their credit cards, which puts that card's account history on your credit report. If you are doing this, make sure the primary user pays on time every month and carries only a low balance on the card.
  2. Get a secured credit card on your own, which is a card with a very low line of credit, linked to a savings account with a deposit equal to your line of credit. Banks are willing to offer these because their financial risk is very low when they have your savings account as a backstop.

Get an installment loan: The other type of credit you should obtain to improve your credit report is an installment loan. Installment loans, such as a mortgage, car loan, or personal loan will have equal payments each month. If you have a mortgage or auto loan that made it through the bankruptcy, just keep this loan and continue making payments. If you don't, consider applying for a secured personal loan through your bank or credit union. Like a secured credit card, you will need to deposit cash in a savings account or CD that the bank will hold until you repay the loan in full.

Pay all bills on time: Once you can obtain credit again, all you should do is sit tight and pay your bills on time each month. Create a budget to ensure you can afford to make your payments, and automate payments, using online bill pay or set reminders to keep from missing them. Each month, you will be adding positive credit history to your report, which will slowly rebuild your credit score and reputation.